Ernst & Young pays fine, costs to settle Equitable Life investigation

Ernst & Young (E&Y) has agreed to pay a £500,000 (U.S. $748,616) fine plus £2.4 million (U.S. $3,594,667) in costs to the Joint Disciplinary Scheme (JDS) and Appeal Tribunal as settlement for its role in the near collapse of client Equitable Life in 2000.

E&Y had appealed a 2008 JDS judgment that imposed a £4.2 million (U.S. $6,290,668) fine and awarded costs. The penalty against the firm also was changed to a reprimand, from a severe reprimand. Details of the 2008 JDS investigation, which had taken place over four years, were never made public.

The JDS is an independent body set up by the Institute of Chartered Accountants in England, Wales, and Scotland to investigate and regulate accountants.

“We are confident that there is no basis for any further litigation in relation to Equitable, both on substantive grounds and because any further claims are time barred,” E&Y officials said in a press release.

JDS and the Appeal Tribunal found that E&Y did not give warning to policyholders of the possible consequences of losing a policyholder lawsuit, and the 1999 financial statements did not show "a true and fair view because of the inadequate provision made."

In January 1999, Equitable Life sought court approval in the Hyman Case for its plan to ask some for-profit policyholders with guaranteed annuity rates to accept a cut in bonuses because the company could no longer afford what it had once promised. Policyholders responded by suing the company for alleged breach of contract. Equitable had cut bonuses during the 1990s, but initiated court proceedings because of protests by policyholders.

At the time, Equitable board members believed their chances of losing the case were remote and did not tell shareholders about the potential financial liability. Equitable won the first stage of litigation, but subsequently lost, first in the Court of Appeal and then in the House of Lords.

Unable to pay the £1.5 billion (approximately U.S. $2.5 billion) cost of losing the Hyman case, Equitable was forced to put itself up for sale. In December 2000, having failed to find a buyer, the insurer was closed to new business.

The JDS report also criticized E&Y for failure to seek independent advice on the outcome of the Hyman case, according to reports.

E&Y said in a statement that the firm “welcomed the judgment by the JDS Appeal Tribunal in overturning all findings relating to objectivity and independence for our work on the audits of the Equitable Life Assurance Society. The allegations that we lacked objectivity and independence were acknowledged by all parties as 'by far the most serious' that we faced – the rejection of these findings by the Appeal Tribunal led to their decision to significantly reduce our fine (by more than 90 percent).”

E&Y added that nothing in its audits caused Equitable or the policyholders any loss or damage.

Equitable imposed zero growth retrospectively for 2000-01. In July 2001, the company reduced the value of all policies by 16 percent and, to discourage people from moving their funds, policy holders were hit with financial penalties of up to 12 percent of their total savings if they left for another provider. Parts of the company were sold to other insurers over the following decade.

The JDS investigation was completely separate from the civil litigation that Equitable mounted against E&Y in 2003, and subsequently lost on appeal in 2005.